Sunday, March 3, 2013

Birth of a currency - welcome to the world, XRP

One of the world's newest monies has been born. A cryptocurrency (these seem to be coming out every week), our new unit goes by the currency code XRP. What makes this even more interesting is that XRP is a chartal currency. Unlike commodity monies, chartal currencies are intrinsically worthless. The only reason they have a positive market value is because people must get their hands on them in order to pay taxes. Just so with XRP—people must pay their "Ripple taxes" with XRP. But more on that later.

XRP and Ripple go hand-in-hand. I wrote about Ripple last week. Ripple is an online environment which allows individuals to exchange IOUs denominated in bitcoin, US$, ₤, or any other unit of account. I'm not going to go into more depth on Ripple but if you're interested, click through last week's post or read this very well-written article from Bitcoin Magazine.

What is interesting is that in order to make use of the Ripple environment, Ripple developers have required that users procure tokens, or XRPs, ahead of time. First, to open a Ripple account, users must deposit 200 XRP as a reserve. Second, in order to extend a line of credit to another Rippler, users need to deposit an additional 50 XRP as reserve. Lastly, to carry out a transaction, 0.000001 XRP must be paid. (While this 0.000001 XRP is destroyed forever, XRP held as reserves are simply released once the account is closed or line of credit withdrawn.)

Much like a sovereign issuer of chartal units, the creators of XRP (the "government") must first spend XRP into the economy so that members of the system are able to pay their Ripple XRP dues (or "taxes"). One hundred billion XRPs have been created, with the founders of Ripple getting twenty billion before distributing the remaining eighty billion to OpenCoin, the organization that will be developing the Ripple system. Potential Ripple users have had wait for OpenCoin to "spend" XRP into the economy before they could begin to use the Ripple system. The first emission was in the form of a free gifting of 50,000 XRP to anyone interested beginning two weeks ago.

Since the initial gifting, XRPs have begun to be traded on secondary markets where they are being priced at around 45,000 XRPs to 1 bitcoin (~1,300 XRP to the US$). Note how well this jives with the chartal idea that the positive value of a fiat token arises because of the obligation members have to pay their dues with that token. Just like chartal tokens are used for more than just tax payments, businesses are agreeing to accept XRP for non-Ripple related transactions.

Most cryptocurrencies, including bitcoin, litecoin, devcoin are bootstrap currencies. To earn a non-zero value, they've paradoxically had to pull themselves up by their bootstraps. No outside institution has given bitcoin or litecoin a helping hand by requiring either as a prerequisite for consummating transactions. Bootstrap currencies are highly unstable—while they've picked themselves up off the ground by pulling on their own bootstraps, they can just as easily lose grip of their bootsraps and crash back to zero.
The demand for XRP, on the other hand, is underpinned by the necessity of using them to pay Ripple dues.
This demand anchors XRP's price to the downside.

You'll notice that one traditional element of chartalism is missing here: the state-nature of chartal money. Opencoin and Ripple are private institutions... and yet they have created a chartal currency. It would seem that there is nothing in the idea of chartal currencies that requires the state. (I made this same point in an older post.)

It seems to me that XRPs would have value even if there were no Ripple fees to pay. Their value doesn't come from the fact that users have to pay fees, but rather from the fact that users see Ripple as a useful system, and have to get XRPs to use that system.

The Ripple site says that the system would be entirely free but that "for security reasons each transaction costs the equivalent of 1/100th of a cent". So the fees seem to be just a cost of using a system which already has some value.

The equivalent might be a country where everyone is obliged by law to use a certain currency, otherwise they're not allowed to trade.

Yep, that's a chartal currency. If Ripple figured out some other technique to secure the system and forthwith removed XRP fees and reserve requirements, would XRP have positive value? Even if XRP didn't hit 0, it would probably fall to a some value far below its previous one.

The XRP vs IOU distinction is something that is a bit confusing to first time Ripple users. Yes, users can create personal Ripple IOUs. These are much like p2p credit or giro systems, as you point out. And as you point out, these IOUs are not chartal. These are credit-based currencies.

But within Ripple, developers have also created a one time issue of XRP. XRP are digital tokens that must be acquired in order to transact in Ripple IOUs. The XRP are the chartal units I'm talking about in this particular post. XRP are not redeemable in $ or BTC. They are not credit. They're like subway tokens. In order to get into the subway system, you have to buy a token ahead of time.

So just keep in mind that Ripple is comprised of the main IOU feature and also an XRP component that works behind the scenes. It just so happens that XRP can also be used as an exchange media, just like if subway tokens circulated outside the subway system.

Off topic - but I'm interested in your opinion in tis article in which we try to integrate monetary statistics, invoices and endogenous money into one framework: http://peemconference2013.worldeconomicsassociation.org/?paper=monies-debt-and-policy-the-concept-of-endogenous-money-as-a-basis-for-household-and-non-financial-companies-instead-of-bank-centered-monetary-statistics

This is from Knapp's "the State Theory of Money" (Chapter II 8b, p.145):

"According to our conception, so long as bank-notesare not State-accepted they form the Chartal moneyof a pay-society or group which is not the State, andso are a special case of a privately issued means ofpayment."

Not sure what he's on about exactly but he seems to agree with you that the term "chartal" can apply to non-state currencies.

Putting cryptocurrencies into circulation is a major issue in itself. Devcoin has a positive attitude in that respect. But consider this: the major killer on our planet is plain hunger. Meanwhile, food surpluses are converted into ethanol for cars instead of donating them to the World Food Program, who canot complete its mission in war zones and famine stricken areas. So why not put crypto$ in circulation through the WFP (or any other humanitarian project)?

I'm having quite a bit of trouble getting started with Ripple. I would love to play around with trading and get to know the market , but can't get any XRP. If anyone has any extra and don't mind shooting them my way, my XRP account is:

you can get xrp with ripple labs using your computer on a grid network for their projects:

www.computingforgood.com

I have 1000xrp from using this but as yet have not been able to turn it into any other form of currency. I am based in UK so GBP are preferred but as yet everything is in dollar based systems. I'm still trying to understand the whole thing but I'm accumulating about 50xrp a day with the ripple labs thing. If anybody had a simple explanation of how to convert them into cash then it would be a very popular website! I would be happy to donate small amounts to the above but not before I understand how much they are worth!